A Multi-period Assessment of Firm Efficiency in the Stock Market using the DEA Approach

Abstract

Structural issues and cyclical fluctuations owing to various macroeconomic events affect stock market performance. This paper aims to evaluate the efficiency of leading firms listed on the National Stock Exchange (NSE) in India over a five-year period. We apply an input-oriented super-efficiency Data Envelopment Analysis (DEA) approach with Variable Returns to Scale (VRS) and also account for Constant Returns to Scale (CRS), with input variables namely Beta, the price-earnings (PE) ratio, and price-to-book, and output variables namely return on equity (ROE), earnings per share (EPS), and market capitalization, to reveal a strong foundation of best-in-class companies. Power Grid Corporation, ONGC, Hindustan Unilever, Cipla, and Dr. Reddy's Laboratories are the companies that reach efficiency in all five years of our analysis, i.e., Tier 1 efficiency. This establishes that underlying valuation multiples, alongside strong underlying fundamental outputs, reveal underlying structural efficiency.